Markets week ahead: Eurozone business activities and Fed rate decision in focus

The financial markets face a busy final week before Christmas. Three major central banks, including the Federal Reserve (Fed),  the Bank of England, and the Band of Japan are set to decide on their interest rates. In the eurozone, investors will focus on flash manufacturing and services Purchasing Manager Indices (PMIs) for key economies. 

Europe

S&P Global will release the flash manufacturing and services PMIs of France and Germany for December. Last month, manufacturing activities in Germany were revised down to 43.0 from 43 in November, unchanged from October. The data implies deep contraction in the sector due to political and economic uncertainties. Germany’s services PMI has also been revised lower to 49.3 from 49.4 for November, the first contraction since February. Consensus suggests slight improvement in December, with the manufacturing PMI expected to rise to 43.1 and services PMI to 49.5, although both remain in contraction territory. 

In France, business activities in the manufacturing sector saw a downward revision to 43.1 from the initial estimate of 43.2 for November. The data represented the 22nd consecutive month of contraction and the steepest slowdown since January. Meanwhile, the services PMI was revised higher to 46.9 from the flash reading of 45.7. However, the data marked the sharpest contraction since January. The political uncertainties surrounding the new year budget have weighed heavily on France's economic outlook, and both figures are expected to remain near current levels in December. 

In the UK, business activities in the manufacturing sector mirrored the eurozone's trend, with the PMI deepening contraction to 48 in November. However, the UK's manufacturing sector continues to outperform its Eurozone counterparts. "Weak global demand from the US, China, and the EU led to a further drop in new export business", said Rob Dobson, Director at S&P Global Market Intelligence. In the services sector, business activity remained in expansion but grew at the slowest pace since November 2023. Analysts predict slight improvements in both PMIs for December. 

The BoE is expected to keep its policy rate steady at 4.75% after rate cuts in August and November. In its November meeting, the bank signalled a cautious approach to easing, citing concerns over persistent inflation. The UK's tight labour market and increased government spending are expected to put upward pressure on inflation. Headline CPI rose to 2.3% in October, up from 1.7% in September, and is forecast to increase further to 2.6% in November. 

United States

The Fed is widely expected to lower the interest rate by 25 basis points this week, making its third consecutive cut this year. The US inflation increased for the second consecutive month in November. The job market showed signs of easing but remained at a tight level. The Fed is likely to persist with a gradual pace of the easing cycle, especially under the Trump presidency next year. This could further pressure the stock markets following a negative close on Wall Street last week. 

In contrast to Europe, the manufacturing PMI in the US was revised up to 49.7 from an initial  PMI reading of 48.8 in November, the softest contraction since July. Meanwhile, the services PMI experienced the biggest growth since March 2022. According to the survey by S&P Global, businesses in the US are increasingly optimistic about 2025 prospects. 

The US retail sales and the final GDP for the third quarter will be also focused. Retail sales are projected to grow steadily but could contribute to inflationary pressures. The third quarter economic growth came in at 2.8% at an annualised pace, slowing from 3% in the second quarter. Additionally, the US Personal Consumption Expenditures (PCE) is another critical indicator for inflation. Economists forecast the index will increase 0.2% month on month in November, compared to 0.3% in the previous month. 

Asia-Pacific

The BOJ's policy meeting will be a key focus for Asia this week. The BoJ, which raised rates in both March and July, continues to diverge from the easing policies of other major central banks. The bank has signalled a willingness to hike rates again if wage growth and inflation align with its forecasts. Markets currently see a 50/50 chance of another rate increase this week.

Meanwhile, the People's Bank of China (PBoC) will decide on its 1-year and 5-year Loan Prime Rates (LPR). After delivering larger-than-expected cuts in October, the PBoC is likely to hold these rates steady at this meeting.